Financial Ratios Flashcards
What essentially are financial ratios
Contextualising numbers
What does efficiency ratios do
Measures how well a business is being managed
List 3 efficiency ratios
Inventory conversion period
Payables conversion period
Receivables conversion period
What’s inventory conversion period tell you
how long does it take to sell stock after investing in it/how long are you holding stock for
What does payables conversion period tell you
how quickly do we pay our suppliers
What does Receivables conversion period tell you
How many days it takes us to receive money from a sale
Inventory conversion period formula
(average inventory/cost of sales) x 365 days
Receivables conversion period formula
(accounts receivables / sales) x 365 days
What do debt/leveraging ratios tell us
Measures firms ability to repay debt
Debt ratio formula
Total liabilities / total assets
What do liquidity ratios tell us
- Measures a company’s ability to pay its bills in short term
Type of liquidity ratio
Current ratio
Examples of current assets include …
Cash, stock, debtors
Current ratio formula
Current assets / current liabilities
What do market ratios do
Measures investors response to owning shares in a company
Example of a market ratio
P/E ratio
P/E ratio formula
market price per share / earnings per share
What does high P/E ratio mean
indicates low earnings compared to market price, which is bad as you want high earnings
- So high P/E ratio could suggest overpriced market price
- Although could suggest high potential
What do profitability ratios do
Measures companies ability to generate profit
Examples of profitability ratios. 3
ROA
ROCE
ROE
ROA formula
Earning / total assets
ROCE formula
Earnings / (assets - current liabilities)
ROE formula
Net income / shareholders equity
Payables conversion period formula
(Accounts payable/ purchases) x 365 days
